Session 9: October 22, 2007

Venture Capital: Term Sheet Negotiations

Quote of the Day

"The key to a leader's impact is sincerity.  Before he can inspire with emotion he must be swayed by it himself.  Before he can move their tears his own must flow. To convince them he must himself believe."  ~ Winston Churchill

Summary

How are venture capital deals structured and what are the dynamics of the negotiation between entrepreneurs and VCs? What role do lawyers play? In this class, a team of lawyers from Cooley Godward (led by Jim Fulton) will lead us through a mock term sheet negotiation. You will prepare the term sheet as a case in advance of the class. You can find this term sheet/case by clicking HERE.

Required Readings (Policy on Required Readings.)

• Readings from the Textbooks:
• Please complete any readings from the last session (on venture finance) that you have not yet completed.
  
• Watch the following short video clips:
• Vinod Khosla (KPCB) - Cycles of Fear and Greed
• Randy Komisar (KPCB) - Success in Venture Capital Firms
• Brook Byers (KPCB) - Size of VC Firms
• Randy Adams (AuctionDrop) - Work with the Right VC
• Fern Mandelbaum (Monitor Venture Partners) - Making Connections

Study Questions (Policy on Study Questions.)

For the purposes of this exercise, please put yourself in the position of the Attorney representing the entrepreneurs (InfiniteWisdom).

1. As the lawyer for the corporation (InfiniteWisdom), what major red flags do you see in the term sheet provisions? 
2. What terms would you like to see changed and how would you like to see them be changed (or eliminated)? 
3. Which changes would you prioritize in the negotiation? 
4. What factors do you think will bear on whether you are able to get the changes you seek?
5. Are there any potential conflicts of interest about which you, as a lawyer for Infinite Wisdom, should be concerned?

   NOTE: YOU SHOULD NOT EXPLAIN THE ENTIRE BACKGROUND AND RATIONALE FOR EVERY TERM IN THE TERM SHEET.   WE ARE NOT LOOKING FOR A REGURGITATION OF THE READINGS ON TERM SHEETS.  Instead, highlight the key issues raised by the questions above, and provide some limited explanation only in the areas that you feel require it, and only to the extent needed to fill in beyond your "client�fs" superficial familiarity with the terms. 

Team Case Analysis (Policy on Case Analyses.)

Analysis (Powerpoint Deck with 6 slides maximum.  This is our Policy on Case Analyses.  Follow it for all cases when your team is assigned responsibility to submit your analysis.)

Slide 1: Team photos and names of team members plus the team name (Team XXX DART of Term Sheet case, for E 145, October 22, 2007)

Slide 2-3: Answer to question 1, above.

Slide 4-5: Answer to questions 2&3, above.

Slide 6: Answer to questions 4&5, above.

Excel workbook: Two pages not larger than 8.5 inches by 11 inches with font we can read.  Do tables, graphs of any of your quantitative analysis to support your positions about changes you would like to make in the term sheet -- you should only do this for any big changes that have quantitative significance -- think of it like a short, simple illustration that you would use to show your client why your suggested changes would be so important.  Use the tools from your readings as well as any tools from your other courses that apply.  Make sure your assumptions are clearly documented.  Cite any sources of tools you use in a footnote.

DART = Decisions + Analysis + Reality Test

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